The reason I am returning to this trusty old topic is that scuttlebutt would have worked rather nicely for me this week, even if it would have required me to be rather quick off the mark. The company in question was the logistics operator DX, whose shares fell more than 60 per cent after a severe profit warning and a cancelled dividend on Tuesday. DX had been responsible for delivering two items of bathroom furniture to my house at the end of last week. Somehow or other, it managed to leave half the order at its depot. While I accept that businesses make mistakes, as an investor I know that such mistakes can be costly in an industry rife with overcapacity and working on wafer-thin margins. In the case of DX, we already knew it had problems; we have been negative on the shares for some time. A botched delivery offered a clue that these were far from resolved.
DX’s troubles also provide a useful reminder that we need to be careful of overarching narratives when choosing investments. In this example, this narrative is that the change in consumer shopping habits towards e-commerce is a rising tide that will boost all companies servicing it. In reality, not all will prosper. Companies within the delivery industry are not well protected by what Warren Buffett would describe as an economic moat – a warehouse and a few vans and you are in business. DX’s real customer is not the end-recipient of the goods, of course, but the retailers. If their reputations are being hit by poor service, they can easily take their business to one of the many other delivery providers in the UK.
The business of delivery is, of course, a little more sophisticated than my oversimplified characterisation suggests. In particular, it is increasingly dependent on technology, particularly software, and the companies with the best of this will be able to offer the more reliable and predictable delivery that customers increasingly demand. But getting software platforms right is difficult and expensive, which means incumbency does not always offer protection. Amazon is proving this, and not only in delivery, and I suspect we will soon see the same trend shake up other sectors. Financial services looks an obvious target.
